Currency wars and Germany’s gold

“The erosion of central bank independence around the world threatens to unleash a round of competitive exchange rate devaluations. It is already possible to observe alarming infringements, for example in Hungary or in Japan, where the new government is massively involving itself in the affairs of the central bank, is emphatically demanding an even more aggressive monetary policy and is threatening an end to central bank autonomy,” JensWeidmann (Here)

Central banks have become the main weapon of countries to try to revive their battered economies by devaluing their currency aggressively against the rest. The world is fully immersed in the so-called currency war and the “aggressive” easing announced yesterday by the Bank of Japan is but one more episode of this strategy that has its maximum expression in the U.S. since the financial crisis of 2008.

In fact, from its July lows, the euro has appreciated over 10% against the dollar and is currently trading above $1.33. “Is there any logic in the euro strength when the economy is in recession and we even discuss if there will be more rate cuts?”, says Jose Luis Martinez Campuzano, strategist at Citi. “Yet the truth is that we see the spread of short-term rates between the euro and the dollar rise as perception of risk in the eurozone improves. “

However, when all central banks perform extremely expansionary monetary policies, the results are more weakness in the economy and risk of entering a downward spiral from which it is difficult to escape. In fact, this will be one of the topics of the World Economic Forum that starts today in Davos, which brings together the political and economic elite of the planet.

While the U.S. Federal Reserve has maintained the price of money at 0% and is now in the third program of quantitative easing, the new Japanese government has pushed to increase the central bank’s inflation target to 2%, China has announced further easing in 2013 and Switzerland has fully intervened the exchange rate of its currency.

“Money supply is increasing by about 6% -7% per year globally, which is creating inflation in commodities, and exporting inflation to developing countries that cannot compete in global currency wars, creating more poverty that ends up affecting everyone, “says Daniel Lacalle, manager at Ecofin. “The most important thing is that the velocity of money is collapsing and that means that the economy does not recover, because the message that is launched is ‘do not worry about investing in real assets and invest in risk’. It is creating a monstrous bubble in bonds. “

Lacalle adds: “The problem is that all countries are printing money to deal with a debt that is very difficult to repay but it continues to grow because the disposable income of families and small business profits decrease because states increase the tax burden. Financial repression is negatively impacting economic growth and consumption”.

“Considering the slowdown of recent years in advancing in trade liberalization and the slow growth of world trade, there is fear that in some countries we begin to hear protectionist proclamations . Hopefully there is only threat and not anything tangible, “says Martinez Campuzano.

Germany might fear that the situation will end up exploding.The great danger of this situation is what Germany’s Bundesbank has been warning since the crisis began: hyperinflation and loss of confidence in paper money. Probably for this reason, the Bundesbank has decided to repatriate the gold it has stored in France and the U.S., where it has 3,400 tons valued at €178 billion. A decision that has gone unnoticed since it was announced last week, but that has its relevance in the present context. And the question is, why now?

“With this currency war people lose purchasing power and seek an asset that cannot be devalued, thus increasing the gold bubble, “explains Daniel Alvarez, an analyst at X-Trade. “In this regard, countries are like people: they do not want to lose power and search for value in the precious metal. So in the case of Germany, the measure is primarily political”.

In this sense, Alvarez explains that, first, the Bundesbank responds to the criticism it had been receiving for not controlling its gold during this currency war, and secondly, to promote an image of strength of the orthodox policy promoted by Germany, which will not allow a loss of power in case of manipulated devaluation of the euro if the ECB decides to follow the printing trend.

However, Daniel Lacalle goes a step further and suggests that Germany is hedging its bets in case the situation collapses. “It would not make sense to keep gold in a country that is not yours when there is fear that the system could collapse, because Germans have lived it before. ” In fact, the main concern of Germany, which has been preventing the ECB from copying its U.S. and Japanese counterpart, is precisely the situation of hyperinflation experienced following the First World War. “We don’t know when a paper money war ends, but we know how it ends. Abruptly and with vast consequences. France saw it with the Assignats, Germany with the Weimar Republic”.

“The Germans know that if the system collapses they have gold but physical assets do not support you unless you have direct access to them. This shows that Germany has a perception of economic reality that is very different from the one imposed worldwide, that eternal and exponential easing is an acceptable tool. The problem with this environment is that a currency war is uncontrollable and when you the debt problem becomes one of saturation in one of these countries, the contagion spreads to everyone else. Greece was just a warning. “